Mumbai: Kotak Mahindra Bank Ltd has taken the promoters of Trident Microfin Pvt. Ltd to court for defaulting on loan repayments, the first time that a bank has started legal proceedings against a microfinance institution (MFI) after a crisis hit the industry that aims to provide loans to the poor.
A controversial Andhra Pradesh law last year led to a sharp drop in repayments by borrowers, putting the Rs20,000 crore MFI industry under pressure. MFIs offer small loans at 24-36%.
“Kotak has sent a legal notice to us asking us to pay up our dues within a fortnight from the date of the notice,” said Puli Kishore Kumar, managing director and chief executive officer of Trident. Minthas reviewed a copy of Kotak’s notice.
The bank initiated legal action against Kumar and five other directors after some cheques issued to it by Trident bounced. Trident was making repayments on Rs4 crore of loans to Kotak until January, after which it began defaulting.
Kotak’s spokesperson declined comment, saying the matter was sub judice. “Due to confidentiality reasons, no individual account details and...status can be furnished,” he said.
Trident has total loans of about Rs150 crore from around 23 banks, including State Bank of India and Indian Overseas Bank. It had a loan portfolio of Rs135 crore as of September and 255,000 customers, out of which Rs112 crore has been given to borrowers in Andhra Pradesh.
The southern state, India’s fifth largest, accounts for more than a quarter of the microlending industry. It enacted a law in October 2010, increasing controls on microlenders, after alleged coercive loan recovery practices reportedly led to suicides.
The law made it compulsory for the firms to secure prior government approval for every second loan they disburse, prohibited weekly collection of instalments and doing doorstep business. Following this, the majority of MFIs saw collection rates in the state plunging to 5-10%. A state-wide campaign by political parties also encouraged borrowers to hold back from repaying loans.
Commercial banks stopped giving loans to the lenders, concerned that they would turn bad, bringing fresh lending by MFIs to a halt.
The case complicates a rescue operation that’s currently under way. Trident is one of the five MFIs in Andhra Pradesh that became part of a corporate debt restructuring (CDR) plan. This involves bankers relaxing the rate of interest and extending the repayment period. The other MFIs in the CDR plan are Share Microfin Ltd, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and Future Financial Services Ltd.
Under the current norms, a company is admitted to a CDR plan if 75% of lenders in terms of loan value agree to the proposal. Kotak Mahindra is not part of Trident’s CDR programme.
Senior MFI industry officials are critical of Kotak’s action, given that Trident is involved in the CDR process.
Kotak should have taken a more calibrated approach in consultation with the banks in the CDR that have signed off on the bailout package, said Alok Prasad, chief executive of Microfinance Institutions Network, an association of microlenders. “The bank has taken an unnecessarily aggressive posture.”
The bank initiated legal proceedings before a CDR committee meeting scheduled for Wednesday, according to Kumar. Typically, once a company is part of a CDR plan, banks don’t initiate individual action against the firm.
Due to the deteriorating business scenario in the southern state, many microlenders in Andhra Pradesh had stopped repayments to banks since early this year due to poor cash flow and many, especially the small ones, are on the verge of closure.
Banks have not been too keen to support MFIs ever since the crisis started, and many have stopped lending to these firms. For instance, last year, Yes Bank Ltd had recalled at least Rs100 crore of loans it advanced to MFIs.
“Presently, banks are concerned about their Andhra Pradesh portfolio. Banks are very concerned about the recovery of loans from the state. This scenario is likely to continue at least for the next six to eight months,” said Ravikumar Dasari, manager (NBFC and MFIs) at rating agency Credit Analysis and Research Ltd.